Nordstrom Invades Canada

The U.S. chain announces the worst-kept secret in Canadian retail

In March, Sears Canada announced it was selling its leases for stores in Vancouver, Calgary and Ottawa back to landlord Cadillac Fairview for C$170 million. All three are in prime locations and will close in October. Immediately, the speculation began to percolate that Nordstrom (NYSE:JWN) or some other American department store would assume those leases once renovations could be completed.

Speculation no more. The Seattle-based chain announced this morning that it indeed was expanding into Canada with the first of four stores to open in the fall 2014. What does it mean for investors?

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Let’s first consider how this affects Sears Holdings (NASDAQ:SHLD), the majority owner of Sears Canada. When Eddie Lampert completed the merger between K-Mart and Sears in March 2005, Sears owned just 54% of Sears Canada. In a little over seven years, the billionaire’s increased its stake to 96% as of the end of July.

The sale of the three leases in higher-end locations seemed to indicate that Sears Canada was moving to the suburbs, where it does its best business, and leaving downtown for people like Nordstrom and Hudson Bay.

However, in July, it sold its lease for the Deerfoot Mall in Calgary back to the landlord. One look at the store directory, and I would think that mall is exactly the Sears demographic. Clearly, both companies are struggling to keep the cash flowing. In May, Sears Holdings announced that it was going to give shareholders 45% of the shares in Sears Canada and then explore selling the rest.

Up until the last 12-18 months, Sears Canada was a shining beacon in an otherwise dreadful operation. Now that it’s fallen on hard times, Lampert wants nothing to do with it, but not before selling as many leases as it possibly can. The entire Sears empire is headed for the trash heap.

How badly does Canada need quality department stores?

Toronto is the fourth- or fifth-largest city in North America, yet until February 2011, when the Ritz Carlton opened its doors, there wasn’t a single five-star hotel to be found in the city. As the Toronto International Film Festival continues its usual two-week run in September, it’s amazing that movie stars in previous years were able to cope with the stark accommodations available.

Now we have four five-star hotels, and magazines like Forbes wonder how sustainable this is. I don’t know how many five-star hotels exist in New York City, but I’m sure it’s much higher than four. Toronto is a cosmopolitan place, and developers were simply meeting an unmet demand. Department stores are no different.

Nordstrom veteran Karen McKibbin is the new president of Nordstrom Canada. McKibbin’s 27-year tenure with the company, most recently in charge of its stores in Northern California and Hawaii, makes her an excellent choice to lead its expansion. The first store opens in Calgary followed by Ottawa, Vancouver and Toronto. By the fall of 2016, Canada will have 665,000 square feet dedicated to the Nordstrom customer experience.

Toronto will be a newly built location, while the other three are converted Sears stores. President Blake Nordstrom suggested in the press conference that Nordstrom could see as many as nine full-line stores in Canada when all is said and done, which likely means another store in Toronto and Vancouver and one each in Montreal, Edmonton and possibly Winnipeg.

As for its Rack off-price concept, the number of stores opening is unknown at this time. However, Canadians tend to be more price-sensitive, so they’d probably be well received. Not surprisingly, the Vancouver store is by far the biggest of the four new locations. Nordstrom has built a significant online customer base in Vancouver and the lower mainland of British Columbia, so it was only natural that its store there reflects the existing relationship.

What are the financial implications?

The average Nordstrom store will generate approximately $450 per square foot in fiscal 2012. The average mall in the U.S. delivers $400 per square foot compared to $600 in Canada. Let’s assume that difference remains in place through the end of 2016. It could mean sales per square foot as high as $805 in Canada, generating $535 million in revenue — or 50% higher than the same four comparable stores in the U.S.

I’m not saying that’s what’ll happen, but Nordstrom doesn’t send one of its best employees to run this show if it doesn’t see huge potential.

While Nordstrom shareholders are preparing for a party, Sears shareholders are headed to a wake on both sides of the border.

As of this writing, Will Ashworth did not own a position in any of the stocks named here. 

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